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A mixed bag performance; leverage to rise on higher capex guidance

The Ramco Cements’ (TRCL) Q2FY23 EBITDA at Rs1.8bn (down 53% YoY) was below our / consensus estimates due to higher than expected fuel costs. Cement volumes were up 22% YoY at 3.31mnte, implying a 3-year CAGR of ~7% backed by capacity expansion. Total cost/te was up 19%/9% YoY/QoQ against dip in realisation by 1% YoY and flat QoQ. This resulted in blended EBITDA/te reporting a sharp decline of 62% YoY and 39% QoQ to an 8-year low of Rs555/te (I-Sec: Rs696/te). Management has nearly doubled its capex guidance for FY23 and FY24 to Rs17bn and Rs9bn, respectively. This is largely due to the preliminary work at the Kurnool unit (likely expansion of unit) in order to protect the market share led by heightened competitive intensity. We believe capex guidance is a bit aggressive, given the current leverage position (FY24 net debt to EBITDA>2.5x) and the operating cashflow TRCL may generate over the next two years (~Rs19bn). Factoring in higher than expected fuel costs, we cut our FY23-24E EBITDA by 1.5-17%. We also reduce our target price for the stock to Rs785/sh (earlier: Rs830/sh) based on 12.5x Sep’24E EV/E (earlier 13x) on quarterly rollover. Maintain ADD. Key risks: Lower demand/price and higher costs.

* Revenue increased 20% YoY to Rs18bn: Volume growth was robust at 22% YoY (flat QoQ) to 3.31mnte (~70% clinker utilisation) implying market share gains. Infrastructure segment was the primary demand driver in East and South India in Q2FY23. TRCL aims to continue the pace of volume growth led by ramping up of the newly-commissioned capacities. On the pricing front, management expects prices to be under pressure due to a) consolidation in cement industry and b) capacity addition gaining pace as it may lead to higher market share completion between incumbent players.

* Cement EBITDA/te declined 64% YoY to Rs492/te. Total cost/te was up 19% YoY / 9% QoQ at Rs4,835/te. Raw material plus power & fuel cost/te rose by 53%/ 19% YoY/QoQ owing to continued inflation in fuel costs. Coal usage was down to 34% vs 38% in Q2FY22 whereas the share of pet coke increased to 54% from 34% in Q2FY22. Share of green power stood at 22% vs 15% in Q2FY22. Freight cost/te was down 5%/3% YoY/ QoQ despite flat YoY and QoQ diesel prices as average lead distance stood at 279km, down 8% YoY.

* TRCL nearly doubles capex guidance for FY23/24E. Management has nearly doubled its capex guidance for FY23 and FY24 to Rs17bn and Rs9bn, respectively. This is largely due to the preliminary work at the Kurnool unit (likely expansion of unit) in order to protect the market share led by heightened competitive intensity. The company plans to increase the grinding capacity of Haridaspur plant, Odisha by 0.9mtpa at capex of Rs1.3bn which is expected to commission in next 9-12 months.

* Leverage to rise with rising capex: Net debt rose ~Rs6bn QoQ to Rs47bn owing to higher working capital requirements. We expect TRCL to generate Rs19bn of OCF over FY23-24E which is lower than the capex requirements during the same period (Rs26bn; excluding capex on likely Karnataka GU). Consequently, we estimate debt levels to remain elevated till FY24E and net debt to EBITDA above 2.5x.

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